Most of the Benefits of a Minimum Wage Increase Would Not Go to Poor Households

January 13, 2014

Most workers earning at or close to the minimum wage are not the sole earners in a household and most of them are not in poor households. For those two reasons, raising the minimum wage is not a targeted way to help poor people, says David R. Henderson, a research fellow with the Hoover Institution.

Economists Joseph J. Sabia and Richard V. Burkhauser examined the effects of state minimum wage increases between 2003 and 2007 and reported that they found no evidence the increases lowered state poverty rates.

Further, they calculated the effects of a proposed increase in the federal minimum wage to $9.50 on workers then earning $5.70 (or 15 cents less than the minimum in March 2008) to $9.49. They found that if the federal minimum wage were increased to $9.50 per hour:

Only 11.3 percent of workers who would gain from the increase live in households officially defined as poor.

A whopping 63.2 percent of workers who would gain were second or even third earners living in households with incomes equal to twice the poverty line or more.

Some 42.3 percent of workers who would gain were second or even third earners who live in households that have incomes equal to three times the poverty line or more.

Moreover, an estimate of gains necessarily overstates those gains if it does not take into account the well-documented effects of the minimum wage destroying low-wage jobs. Taking this into account, Sabia and Burkhauser conclude that an increase in the minimum wage will be even less effective at reducing poverty.

A low-end estimate of the reduction in jobs due to an increase in the minimum wage is that a 10 percent increase would reduce the number of low-wage jobs by only 1 percent.

But even in this best case, they found that an increase to $9.50 per hour would destroy 468,000 jobs.

This means that the benefits of a higher minimum wage to households containing low-wage workers would be even lower than their original estimates.

With a 468,000 job loss:

The net benefit to households containing low-wage workers would be $3.56 billion per month.

The net benefit to poor households containing low-wage workers would be only $389 million per month.

This estimate overstates the gains to households from increasing the minimum wage. Why? Because, to the extent they are able, employers will offset the higher minimum wage by reducing non-money components of worker compensation.